BUDGET ROUND-UP - JUST A SPOONFUL OF SUGAR?
By Luke West
In recent weeks, George Osborne and principal figures in the new Coalition Government appear to have taken a leaf from the book of that epitome of Britishness, Mary Poppins, for it was she who sang: "Just a spoonful of sugar helps the medicine go down..."
With headline giveaways paving the way, the true cost of the emergency Budget was announced. The medicine when taken didn't seem quite so bad. So what was the outcome for charities and their supporters – the taxpaying public?
VAT
Charities were thankfully spared from any seismic changes in the VAT arena, though obviously the increase in the rate of VAT to 20% from 4 January 2011 will need to be budgeted for.
However, the March Budget's rules regarding VAT and postal charges could potentially affect charities – see the back page of this newsletter for more information.
Sunset on transitional relief
When considering cashflow constraints, charities should remember that the transitional relief, introduced in April 2008 to address the cash impact of the reduction in the basic rate of tax, will cease on 5 April 2011. This relief is worth 3.2 pence in the pound. Privately owned charities should seek to secure tax-effective funding while this relief remains and donors are suffering 50% income tax rates.
Fit and proper persons test
The real medicine for charities comes, with or without a spoonful of sugar, in the form of a new definition of charitable status for tax purposes. This will be introduced in Finance Bill 2010. The new definition includes a requirement that the charity's managers and trustees be fit and proper persons (FPP).
HM Revenue & Customs' (HMRC) intention to legislate in this area has prompted some commentators to say that the tax authority doesn't trust the Charity Commission to monitor adequately the honesty of trustees. It is perhaps worth setting the background for why these changes are being introduced.
In order to comply with EU law, UK charity tax reliefs are now extended to European Economic Area countries (with the exclusion of Liechtenstein). As many will know, the Charity Commission only considers applications for charities established in England and Wales and, of course, HMRC must protect the UK's tax coffers.
Also, in recent months HMRC has become aware of highly artificial and contrived tax avoidance schemes using gifts made into charities. These give an individual higherrate tax relief but provide the charity with no financial benefit whatsoever. Clearly HMRC is right in seeking to block abusive schemes such as these.
HMRC is at pains to stress that the FPP tests will vary from case to case to take account of individual circumstances but, in brief, the following factors might lead HMRC to conclude that a person is not a FPP.
- A history of tax fraud or other fraudulent behaviour.
- HMRC knowledge of previous involvement in the abuse of tax repayment systems.
- Information pointing to a heightened risk of involvement in financial impropriety.
- Being barred from acting as a charity trustee by a charity regulator or court, or being disqualified from acting as a company director.
HMRC envisages that the individuals to which the FPP test might apply could include the chairperson, treasurer, secretary and cheque signatories. In larger charities, the test might be extended to employees with finance control.
The consequences of a trustee failing HMRC's FPP test is that the charity could lose its charitable tax status. HMRC has indicated that, where the charity innocently appoints a person who is not an FPP, a period of grace should be available for the charity to 'put its house in order' and redeploy the person not qualifying as an FPP.
How should charity trustees protect the charity going forward? HMRC will expect charity trustees to be able to show, if challenged, that they have given proper consideration to the suitability of people they appoint, especially where they are able to exert control over the charity's finances and tax affairs.
Trustees may therefore wish to obtain a declaration from any new managers, trustees and directors appointed after 5 April 2010. A template is available and includes a declaration by the individual that he/she is a fit and proper person to act as a charity manager. Visit: www.hmrc.gov.uk/charities/guidancenotes/chapter2/model-dec-ff-persons.pdf
Finally, HMRC has introduced the Charities Variations Form for charities to notify HMRC of changes to their organisation. This includes changes to the managers covered by the FPP test. Charity trustees would do well to familarise themselves with these changes.
GOVERNANCE IN THE THIRD SECTOR - A GOOD FIT
By Kim Sanders
The question posed to me regarding the role of governance in the current economic climate left me somewhat speechless, which I am the first to admit is a rare occurrence. It was asked by a well-respected chair of a local charity and, to say the least, I was surprised that he would have had such a thought, let alone verbalising it and conveying it to me. In order to answer the question effectively it is necessary to look at how governance came about and the role it plays within the third sector.
Governance has existed since time immemorial – simply being the activity of governing. All organisations have to have some form of governance in order to function. Certain ancient civilisations were renowned for their democratic approach to governance. The British Empire, although far from democratic, had a reputation for efficient governance, with a small number of staff administering large areas.
However, in the last 15 years the term 'governance' has come to the forefront, first in the corporate sector and then the third sector, with a series of reports and codes introduced.
The first of these was the Cadbury report, upon which successive reports have been built: Greenbury, Higgs and the Walker report, which has resulted in the Financial Reporting Council producing a new Combined Code (now known as the Corporate Governance Code).
In the third sector, regulatory authorities and others have issued their own guidance on governance, including Hallmarks of an Effective Charity (published by the Charity Commission) and Good Governance, a Code for the Voluntary and Community Sector (produced by the National Hub of Expertise in Governance).
In any discussion on governance it is important to understand what it means in the context of a charity; the following definition from the Governance of Voluntary Organisations (Cornforth, 2003) is useful: (Governance is...) the systems and processes concerned with ensuring the overall direction, effectiveness, supervision and accountability of an organisation.
Governance is often seen to be the sole responsibility of the trustees, but in a wellgoverned organisation it trickles through all the strata – management, volunteers and stakeholders – of an organisation.
Many believe that the current economic crisis will hit the third sector very hard in coming years – indeed, I have heard instances of local authority grant cuts ranging from 25% to 40%. When facing such significant reductions in income, it is easy for the principles of good governance to be pushed to one side as the charity fights fire simply to survive. However, history has shown us that it is the organisations that follow the principles and policies of good governance that endure.
There will always be the argument that governance costs money and is a luxury few organisations can really afford, but isn't governance one of those areas where you cut your cloth accordingly? And, in truth, can you afford not to follow the principles of good governance in this age of increasing accountability?
Looking back at how modern governance came into being, the legislation, and more recently codes of good practice, have all evolved in a response to some form of scandal – the South Sea Company, Polly Peck, the Maxwell pension raid and banking scandals. In times of economic hardship, the systems and policies that ensure effectiveness, leadership, supervision and accountability have more of a role to play. Boards should view them as a companion on a difficult journey; not as an adversary who should be struck a blow at the first opportunity.
60 seconds on... The principles of good governance
Board leadership
The board should lead and control the charity and act collectively to ensure the delivery of its objects, set the strategic direction and uphold the values of the charity.
Board control
The board should be responsible and accountable for ensuring that the charity is performing well, is solvent and complies with its obligations.
Board performance
The board should have clear responsibilities and functions, and should be organised to discharge them effectively.
Review and renewal
The board and the organisation should be reviewed periodically to ensure continued effectiveness.
Delegation
Authority should be delegated in a clear and appropriate manner and that delegation reviewed.
Openness
The board should be open, responsive and accountable.
White Stone Group Limited
White Stone was established in late 2009 in response to a need for excellent advice and realistic solutions to company secretarial and governance issues, experienced by clients in the corporate and charity sectors.
DEALING WITH PROPERTY?
By Jennifer Hotston of Charles Russell LLP
Charity trustees have a duty to act in the best interests of their charity. How this is achieved is usually left to the trustees' discretion. However, if trustees wish to sell, lease or mortgage property, the Charities Act 1993 (the Act) sets out clear procedures that must be followed to ensure that the transaction is made on the best terms for the charity.
Requirements of the Charities Act 1993
Pursuant to the Act, all registered charities and excepted charities (but not exempt charities) must comply with specific requirements when disposing of or mortgaging property, unless they have obtained an Order of the Court or the Charity Commission.
What is a disposal?
The Act doesn't define disposal. A disposal is thought to include the sale of land, as well as the granting of a lease or the granting of rights over the land. However, some dealings with property will not come within the scope of the Act, such as a simple licence or tenancy at will. Therefore, charities looking to share their property in order to satisfy the public benefit requirements may be able to avoid this restriction.
Is an Order of the Court/Charity Commission necessary?
For the majority of property transactions, if a charity can satisfy itself that the procedure in the Act has been complied with, an Order of the Court/Charity Commission (an Order) will not be required. This procedure must be followed before the charity commits itself to the transaction and enters into a binding contract. The procedure involves:
- taking written advice from a qualified surveyor
- advertising the sale/lease or other proposed disposal unless the surveyor says otherwise
- the trustees being happy that they are being offered the best deal possible in the interests of the charity.
The matters to be considered by the surveyor and the charity are set out in the Charities (Qualified Surveyor's Report) Regulations 1992 and must be followed.
The Act restricts the surveyor who can give this advice to members of the Royal Institution of Chartered Surveyors. Some people see this as being excessive and disproportionate to many transactions. In an attempt to simplify transactions, the Government has been in consultation to widen this restriction. At the time of writing, the final outcome of the consultation is awaited.
Similar but less onerous steps can be followed if the charity is granting a lease for less than seven years. However, additional steps must be taken when disposing of property that is held for a specific purpose, such as land to be used for educational purposes. If the disposal is to a connected person, an Order will be required.
Mortgaging property
If an Order is not obtained before mortgaging a property, the charity must obtain advice from an appropriately qualified person. The extent of the advice required will depend on the nature of the mortgage.
Documenting a disposal/ mortgage
A statement needs to be included in the document purchasing or disposing of property confirming whether the charity involved is exempt or non-exempt. The trustees will also need to give a certificate on the disposal or mortgaging of property confirming that they have either complied with the procedural requirements of the Act or that an Order has been obtained.
If a certificate is not given on the disposal or mortgaging of property and the charity has not complied with the obligations contained in the Act, the transaction entered into by the charity may be held to be void.
VAT AND POSTAL COSTS
By Hannah Dobson
After some months of speculation, the 2010 March Budget (and the emergency Budget in June 2010) finally confirmed that certain postal services, including individually negotiated services, ParcelForce services, 'door-to-door' unaddressed mail services, and mailroom services provided by the Royal Mail (including ParcelForce) will become subject to VAT at the standard rate from 31 January 2011 (the standard rate increases from 17.5% to 20% on 4 January 2011).
Those affected, including charities and others unable to recover all or part of their input tax, will need to consider whether they can make reclaims, and whether existing postal service contracts should now be renegotiated.
The change in VAT treatment of these postal services arose as a result of a European case involving TNT Post (UK) Limited (C-357/07). The European Court agreed with TNT that individually negotiated postal contracts with the Royal Mail and all contracts with ParcelForce should not be covered by the VAT exemption. For TNT, and other courier providers, this finally put their businesses on a level VAT-playing field with the Royal Mail.
This means that where previously these Royal Mail and ParcelForce contracts were considered to be exempt from VAT, the services should actually have been subject to the standard rate of VAT. As a result, what was previously regarded as a Royal Mail/ParcelForce VAT exempt service of £100 during a period when the VAT rate was 17.5%, could actually have been a supply of £85.11 and input VAT of £14.89.
It may be possible for Royal Mail/ ParcelForce customers to claim a refund of this inadvertently paid (or rather imputed) VAT, retrospectively for a period of up to four years.
Royal Mail/ParcelForce customers, including any charities, that have any individually negotiated contracts with Royal Mail/ParcelForce for mailings or courier services, should therefore consider whether a reclaim of VAT can be made in respect of such contracts. As charities generally cannot recover VAT in full, a claim may still be possible to the extent of the charity's ability to recover input VAT.
The future imposition of VAT on certain Royal Mail and ParcelForce mailings could result in a significant additional cost to most charities in the future. The postage costs of door-to-door mailings, donation envelopes and similarly delivered items are likely to become subject to irrecoverable VAT. Charities should therefore consider renegotiating the value of contracts with the Royal Mail/ParecelForce and consider whether alternative service providers could offer better value.
HMRC does not offer many concessions to charities, but most are hopefully making use of the VAT zero-rating provisions for certain services and goods in connection with some packaged items. If the contractual arrangements are correct, this also includes zero-rating for the postage of such items. How does this work? If you check your receipt for the home delivery of your weekly shopping, you will notice that the delivery charge is zero-rated to the extent that the food items you have purchased are zero-rated. This is due to the grocery store undertaking to deliver the shopping as part of the sale of the food items. The same rule applies for zero-rated packaged items where the supplier is also the person undertaking the postage of such items. Thus if the items packaged qualify for zero rating, then provided the supplier is also the person required to post the items, the postage costs should also qualify for zero rating.
To mitigate any adverse impact of these changes, the immediate response of charities should include:
- considering submission of retrospective VAT reclaims to HMRC without delay to avoid losing out due to the four year time limit for reclaims
- re-examining supply chain contracts to ensure cost effective service provision
- checking that HMRC concessions are fully used, particularly zero rating of certain packaged items.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.